Commodities flashing hot for traders

We’ve seen crude dominate the flows with WTI crude cash trading through the 200-day MA and into $79 – the momentum traders, on the higher timeframes, will be quietly confident of a push into the April highs of $83.46. Considering as the price has moved from $67 in June, it’s no surprise that US inflation expectations have started to rise.

Daily chart of WTI crude

We can measure inflation expectations through several channels, but one of the more common measures is in the bond market through ‘breakeven rates’ – we can see this on TradingView under the ticker ‘T5YIE’. This measures how inflation is expected to average over a specific duration – in this case over 5 years.

We also see gasoline pushing into $2.95 and higher for a sixth consecutive day. This is one that might be getting a touch too hot and could get attention from the mean reversion players. However, there is good underlying momentum, so if looking to get aggressive and play for a reversion to a mean, taking the timeframes into 30-minute charts seems prudent.

Nat Gas needs close attention – the global household could really do with Nat Gas staying subdued, but the set-up on the daily is ominous and offers a rising probability that a big move is coming. We see that price has held a $2.85 to $1.90 for 127 bars, and we see a true Bollinger band squeeze.

Momentum and trend moves start with breakouts, and as any trend-follower will attest to, many breakouts fail. So, you must be in it to win it, and while you typically get lower strike rates, the trend-follower hunts outlier moves within a distribution. This means holding in the hope of a 5 to 10R trade. Nat Gas – while it is often a high-octane ride - has the set-up that could do that.

We revert to the ag space and see wheat up 8%, albeit driven by a different set of news flow. Price has closed on highs of the daily bar, so the buyers have been in control to the bitter end. When we consider the distribution for the price, this type of close is thematic of future higher levels.

We also see cotton, corn, OJ, soybeans, cocoa, soymeal, and Oats all either trending strongly with a good rate of change (ROC) or near 52-week highs. There are signs of divergence in play – see oats as an example – and for those in longs, having a systematic stop in place that trails price will serve you well.

Again, moves across the commodity spectrum need monitoring, not just because it offers an opportunity for trend and momentum-focused traders, but because there is a macro consideration that could see volatility rise – if goods prices start to rise then it could be new news that central banks need to react to. Naturally, in a slowing demand environment, one suspect's commodity prices shouldn’t kick up too far, but perhaps they were mispriced and reverting to a fair value.